A recent Massachusetts letter ruling refines its definition of cloud computing, a rapidly evolving computer medium that includes, among other things, the Internet provision of Software As a Service (SAaS), Infrastructure As a Service (IAaS), and Platforms As a Service (PAaS). SAaS - the most common form of cloud computing – involves the provision of access to software applications hosted on the server of the application service provider.
Many states have yet to provide sales tax guidance regarding the taxability of these services. In years past, states defined the sale of application software in a box off the shelf as a sale of tangible personal property and taxed it accordingly. Then, the Internet and evolving technology enabled software purchasers to electronically download application software from a retailer’s server to their own computers, requiring states to choose whether to expand their definition of taxable software sales to include electronic downloads. However, electronic downloads did create disparity in the tax treatment of such sales versus traditional “software in a box” sales. Cloud computing enables a customer to remotely access an application software provider’s server over the Internet and use the software without downloading it to their own computer.